Determining Insolvency Regions in Banks: A Stochastic Dynamic Approach Integrating Liquidity and Credit Risk
创建于 更新于
摘要
We develop a continuous-time structural dynamic model to determine the exact insolvency regions of banks arising from the non-linear interaction between liquidity and credit risk. By embedding Basel III constraints (LCR and NSFR) into a stochastic optimal-control framework, we derive the exact insolvency boundary via the Hamilton-Jacobi-Bellman equation and propose a surrogate closed-form approximation for real-time monitoring. Calibrated on granular Iranian bank balance-sheet data, the model reveals a non-linear “insolvency cliff”: the joint occurrence of liquidity stress and credit portfolio deterioration accelerates insolvency more than either shock alone. The surrogate function enables regulators to perform rapid stress testing and early warning in practice, bridging rigorous theory with supervisory needs in emerging markets. [page::0]
